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FedEx (FDX) and UPS (UPS) Won’t Deliver the Goods In China

domestic companies are already much further ahead in their own plans for China’s logistics industry, an industry growing in proportion to the country’s boom in B2C e-commerce, worth $298 billion in 2013.

A much more common sight than taxis or bicycles on Chinese roads now a days are the ubiquitous electric bikes and tricycles stacked with unwieldy mounds of parcels, manned by youngsters who just five years ago would have most likely been looking for factory work but who are now making wages to send home via door-to-door deliveries. Both they and the delivery shops dotting most every urban city block are the visible signs of a logistics industry growing in typically rampant, organic Chinese fashion.

Thus, FedEx’ and UPS’ decision to capitalize on this trend comes far behind the early starts and solid progress of domestic delivery companies, such as SF Express. SF Express is a household name among China’s 300 million online shoppers, as ecommerce vendors rely on the company’s modest pricing and dead-on delivery times to garner the ratings that can make or break their online stores.

Other private delivery companies such as ZTO Express and Yunda provide comparable quality of service, all of them at prices lower than FedEx and UPS. But SF Express is integrating the logistics chain, investing in not only ecommerce shops but also 500 stores across every Chinese province, where customers can order online and pick up their goods. This online to offline model is a subject of much promise and discussion in Chinese logistics circles, a conversation in which mention of FedEx and UPS is entirely absent.

Meanwhile, the two companies responsible for 70% of all China’s B2C ecommerce, JD ($JD) and Alibaba (ALBCF), are investing heavily on the delivery segment of their services, injecting capital into China’s lagging logistics infrastructure to take pole position for the year 2020, when close to half of China’s retail is expected to transact online. JD’s competitive advantage against Alibaba has always been logistics, guaranteeing delivery terms itself, while the latter left fulfillment to its individual vendors.

Now, however, Alibaba is raising a consortium to inject $16 billion into China’s lagging logistics infrastructure. Furthermore, the company signed an agreement this June with the state-run China Post Group, the world’s largest postal service, for comprehensive cooperation in not only logistics but also ecommerce, finance, and data security. Given the Chinese government’s record of helping its partners nullify foreign competitors (most memorably Google (GOOG)in favor of Baidu (BIDU) ), the advantage Alibaba gains from this partnership cannot be understated.

Meanwhile, neither UPS nor FedEx has revealed any planned innovations with which to position itself favorably in this increasingly competitive industry. Aside from acquiring licenses to operate domestically in more Chinese cities, UPS President of Global Affairs Laura Lane admits, “We haven't developed a concrete plan yet in terms of where we want to go beyond those 33 cities."

This lack of strategy will be aggravated by UPS and FedEx’s reliance on vans and trucks for customer delivery. Navigating China’s congested city streets via four-wheel vehicle is not about efficiency, but rather a means to display status and escape the smog. UPS and FedEx will be stuck in traffic, whilst electric bikes emblazoned with JD’s bright red colors go zipping past, saving time on deliveries, and fuel costs for the parent companies.

Not so long ago, access to the Chinese market was half the battle, given the paucity of local brands and services with offerings to match an experienced western company’s. But in a field rampant with agile, well-funded local competitors, UPS and FedEx are at the beginning of a long, expensive struggle that even uber-efficient DHL pulled out of, recognizing that Chinese rivals were willing to survive on wafer thin margins for the long term in order to win the war.

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